Trading Securities - Order Types

There are four different types of orders:

  • Market order - this order is designed to be executed immediately, at the current market price - no price is specified on the order.

  • Limit order - this order does specify the price desired; however, there is no guarantee that the order will be filled. There are two types of limit orders:
    • Buy limit order - this order is entered at a price below the current market price (since it would not make sense to specify a higher-than-market price!).

    • Sell limit order - this order is placed above the current market price.

  • Stop order - this order is used to trigger an execution only if the market reaches a certain level; when this limit is reached, the stop order becomes a market order. As a result, there is no way to predict the actual price the security will receive. As with limit orders, there are two types:
    • Buy stop order - these are used to limit losses on short stock positions and are always placed above the current market price and filled only if the market rises.

    • Sell stop order - these are used to limit losses on long stock positions and are always placed below the current market price and filled only if the market falls.

Look Out!
Note that stop orders become market orders once the stop price has been reached, but there is no guarantee that the market price at execution will be close to the stop price. For example, an investor could place a sell stop order at 45 when the market is at 50; if the market drops quickly, the stop could be triggered at 45 but executed at 42.

  • Stop-limit order - this order is used to ensure that a specific price is received, but the order is only placed when a specific stop price is reached. The stop price and the limit price do not need to be the same. However, there is a risk that the stop price could be reached, but the market never reaches the limit price. In that case, the order will never be filled.
Account Types
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